Internet revolution: a new paradigm or another bubble?

It is only a matter of time before the US internet bubble is burst, investments collapse and consumption of the masses falls back because of a loss of confidence in the 'new economy'. The internet revolution is a great technical leap forward. But under capitalism, it is being exploited by more and more precious investment capital being thrown into this tiny sector of the economy at the expense of all the rest.

It all started in October 1969. Scientists at the University of
California, Los Angeles, were ready for a critical experiment. They
had a computer and communications node, while colleagues installed
similar equipment up the coast in Menlo Park. They planned to test
whether they could link the two computers over telephone lines to
operate as one system. The researchers began to tap in the message:
'log in' to make the link. The system crashed.

Thus was the beginning of internet revolution. By the end of the
month they achieved the link. Of course, the purpose in those days
was to ensure that nuclear missile systems could be kept operative
even if part of the network was put out of action in a war.

The commercial importance of this breakthrough was not fulfilled
for another 25 years - just as the invention of the steam engine by
James Watt in the 1780s did not become really useful and developed
until the launch of the rail engine two decades late. Similarly the
petrol combustion engine did not lead to cars and trucks for about
two decades.

The significance of the internet is that it takes the computer and
'information technology' onto a new stage: computers now communicate
with each other. That is producing a dramatic exponential increase in
the speed of transmitting information. Computers and the microchip
were for the era of the 1970s and 1980s. The 1990s and the first
decade of the new Christian-based millennium are for
telecommunications and the internet. The internet will expand across
the globe just as the railroad did in the latter half of the 19th
century and the motor car and airplane did in the latter half of the
20th century. The economic result will be a huge reduction in the
time taken to transmit information and, with it, a fall in the costs
of producing goods and services.

It's an old law that the doubling of microchip performance, or a
halving of its cost, takes place every 12-18 months. Similarly,
between 1650 and 1950, the cost of physical force to make one average
unit of production things fell from thousands of man-hours (dollars)
to just a few minutes (cents). In the last 30 years, the cost of
transistor or memory chip has fallen from $7 to a few millionths of a
cent. The internet revolution will have a similar impact.

Internet commerce

By 2003 there will be 500m people connected to the internet, or
about 10% of the world's population. By 2003, over 65% of US
households will be connected. In the same way that the railroad,
motor car, electricity connections and the airplane developed huge
new industries and capitalist conglomerates, new internet companies
are springing up as fast as you can say .com. By 2004, it is
estimated that worldwide business-to-business internet commerce will
reach over $7trn. Internet commerce in the US will reach $2.5trn, or
about 25% of the annual output of the US in that year. Already the
internet companies have grown bigger in size than the former
technology giants (airlines, publishing and healthcare) and are
catching up the automobile industry quickly.

The impact of the internet revolution has already been felt on
economic growth. The information technology sectors as a whole
(computers, telecomm, internet, software etc) in the US are growing
at double the rate of the rest of the US economy. They now contribute
over 8% of US annual output on their own. Indeed, since 1993, without
the IT sectors, US economic growth would have been 1% of GDP lower
each year. In 1999, nearly 80% of all investment by capitalist
companies in the US went into information technology sectors! Over
one million jobs have been created by the US high-tech sector since
1993 and there are now 8m people working there at generally 50%
higher average wages.

All this has convinced most capitalist commentators that the IT
revolution has given the US and other major capitalist economies a
new lease of life - even the magic elixir of immortality. In this
'new paradigm', economic growth will continue at breakneck pace (by
that they mean about 3-4% a year) and inflation will stay low (about
2% a year). And there will be the achievement of 'full employment',
something not achieved in the 200 years history of industrial
capitalism, except for very brief periods. Once again, but this time
with much hugely bullish confidence, the capitalist gurus are
claiming that their system has now achieved perfection and will never
enter a major crisis of falling output, collapsing investment and
mass unemployment again.

But in their euphoria, they have forgotten the words of their own
history. This is what the editors of the US journal, Business Week,
said back in the summer of 1929: "there has been a breakthrough in
technology and industrial management, a firmly implanted social
optimism, widespread public participation in the stock market,
greater access to personal credit, better statistics, better railroad
transport and stabilised prosperity".

Yet look what happened over the next three years in the US to that
boundless optimism about the new technology! Just six months later,
Business Week said this: "Every new era in history has been based
upon the exaggerated enthusiasm set in motion by some single new
industry. At one time it was a gold rush or real estate boom. In our
era it has been the automobile".

Salvation from the crisis?

Now in the decade of the 2000s it will be the internet. The
technological marvel of the internet will not save capitalism from
crisis, just as the railroad did not in 1880s and the automobile did
not in the 1930s. Indeed, for some very good reasons, it will
exacerbate the inevitable slump in capitalist prosperity. The first
reason is that, just as the railroad and automobile before, the
internet is drastically lowering costs. But this is a huge
deflationary force on capitalist companies' ability to keep up
prices. Intense competition and huge investment of capital is
boosting economic growth now, but it is doing so at the expense of
capitalist profitability.

Internet companies do not make any profit. They remain a huge cost
to the rest of the economy. But investment in the new technology has
become a necessity to compete. This necessity has leapt well beyond
the ability to garner surplus value from the investment. Just the top
nine Internet companies are worth $100bn on the US stock market. But
they make sales of just $1bn, or 1%. And that is just sales. They
make no profit. Compare that even to the ten leading technology
companies like Microsoft. They are worth only $50bn, but they make
$100bn in annual revenues (and some of these make a profit too!).
Overinvestment and overcapacity will be the outcome of the internet
boom.

The internet and IT revolution is a huge deflationary force on the
capitalist economy. That is the result of system that develops
technology through competition and private capitalist investment.
Intense competition means that very quickly the profitable advantages
gained by the first company to use the new technology quickly
disappear. The eventual outcome is that everybody uses the new
technology and nobody gains extra profit as a result. Investment
eventually shoots up much faster than the extra productivity of
labour created. In other words, the rate of profit in relation to
each unit of capital stock begins to fall. The faster the technology
is adopted, the quicker prices fall, and the speedier profitable
advantages disappear. Eventually, the large swathes of the new
industry will go belly up from over optimistic investment.

In the 1850s there were hundreds of railroad companies formed,
asking investors for money. How many were left by 1880? Similarly in
the 1920s and 1930s, there were hundreds of automobile companies
formed. Ask a Rover worker how many were left by the end of the 1970s
and how many there are now.

And second, the hangover from the internet investment bubble will
be worse this time. The result of previous overinvestment binges was
deep slump in the capitalist economy. The response was for
governments to intervene: to nationalise bankrupt utilities like
water, electricity, railways etc and to direct wage earners money
into renewing these industrial sectors. At the same time, the welfare
state was formed to provide some safety net for irate unemployed
masses. Above all, work was eventually found for them in the biggest
state sector of them all: the armed forces. The collapse of the
railroad age in the 1880s set the stage for imperialist rivalry in
Europe and eventually World War 1. The Great Depression in the 1930s
after the overinvestment of the automobile/electricity boom led to
World War 2.

Now many capitalist commentators reject the view that the internet
revolution means another bout of deflation and slump. They argue that
the internet revolution is not some huge stock market bubble. Sure,
prices will fall with the new technology, but so will costs. As a
result, profits will be created and that will mean new jobs for those
in the new sectors, and also as these new workers spend, that will
create new jobs for the displaced workers of old industries like
Rover car workers. The eventual outcome, as long as government does
not muck it up by intervening, will be a lower cost, lower price,
more profitable, faster growth economy - in short, the new paradigm
or nirvana.

But the reality of the internet boom is that while stock market
prices rocket to unbelievable heights, profits of the internet
companies are nowhere to be seen. Elsewhere in the economy of the
main capitalist nations, growth is pitched at about 3% a year,
productivity of labour at about 2% a year and prices remain low. So
there is little profitability in these new investments. Just as the
Asian boom of the early 1990s came crashing to an end in 1997 after a
binge of overinvestment not matched by sufficient profit, so will the
worldwide internet boom.

Just a matter of time

It is only a matter of time before the US internet bubble is
burst, investments collapse and consumption of the masses falls back
because of a loss of confidence in the 'new economy'. The internet
revolution is a great technical leap forward. But under capitalism,
it is being exploited by more and more precious investment capital
being thrown into this tiny sector of the economy at the expense of
all the rest. That happens under capitalism because there is no
planning and no direction of resources. 'Market forces' mean
speculative investment, intense competition between capitalist
investors, and above all, huge over-investment in relation to
profitability.

The canal share boom of 1835-36 was followed by slump and falling
prices. The railway stock mania of 1869-73 was followed by the
biggest depression then seen under capitalism. The same was seen in
the aftermath of the share boom of the 1920s. Japan's stock market
bubble of the 1980s has been followed by ten years of stagnation and
recession. The optimists of capitalism believe that the internet
revolution is really a low-price low-cost boom that will last
decades. The reality is that it is just another speculative financial
market bubble that will turn into a deflationary bust. As I write
just about everybody in the capitalist world, including former
sceptics of internet stocks, now believe that internet companies will
continue to drive upwards for the foreseeable future. When everybody
agrees, you know it won't last much longer.